The Nelson Mandela Bay municipality has pushed back against the National Treasury’s rejection of its proposed write-off of R23bn in historic unauthorised, irregular, fruitless and wasteful expenditure (UIFWE).
The municipality insists the money is now legally irrecoverable because the metro failed to pursue it timeously.
In a strongly-worded response to the Treasury, acting city manager Lonwabo Ngoqo said the municipality stood by its position that UIFWE recorded up to June 30 2021, dating back to 2009, had prescribed and could therefore be written off.
His response follows the Treasury’s rejection of the municipality’s approach, including its view that the affidavit written by Ngoqo and presented to the municipal public accounts committee (Mpac) was legally defective and should be withdrawn.
The Treasury’s intergovernmental relations deputy director-general, Ogalaletseng Gaarekwe, addressed the letter to Ngoqo on August 19.
Ngoqo replied on August 20.
His response formed part of the agenda for Thursday’s council meeting.
However, the issue was deferred for seven days, when the council will next sit to deal with it.
This came after a heated debate over whether the report should be tabled.
“The municipality does not agree that the affidavit presented to Mpac is legally defective, that it must be withdrawn, or that Mpac and council are precluded from considering the matter,” Ngoqo said.
At the centre of the municipality’s argument is Section 12(3) of the Prescription Act.
Ngoqo said the metro was not arguing UIFWE had prescribed simply because it was old, but because it had failed to exercise reasonable care to identify potentially liable officials, political office-bearers and service providers and pursue recovery within the prescribed period.
“Your letter correctly identifies that recovery is the statutory starting point under Section 32 of the local government Municipal Finance Management Act [MFMA], but it does not sufficiently account for the legal effect of prescription where a municipality has failed, despite the exercise of reasonable care required of it, to identify and pursue Section 32 recovery claims timeously,” he said.
“The proposed write-off is not advanced on the simplistic basis that UIFWE is old, nor merely because it appears on a historic register.
“The point of departure is that, in respect of UIFWE recorded up to June 30 2021, the municipality did not within two years thereafter exercise reasonable care to identify the relevant facts, the persons potentially liable, the causes of action, and any right of recovery under Section 32.”
He said that failure had direct consequences under Section 12(3), which deems a creditor to have knowledge of the debtor and the facts giving rise to the debt if that knowledge could and should have been acquired by exercising reasonable care.
“The two years is therefore used as a cautious and favourable assumption in the municipality’s analysis: even allowing for that extended period, the UIFWE recorded up to June 30 2021 has prescribed,” Ngoqo said.
The Treasury has rejected that interpretation and the municipality’s reliance on prescription as a basis for a write-off.
The dispute centres on whether the metro can rely on prescription when it failed to identify liable parties and take steps to recover the money within the prescribed period.
The Treasury has also questioned whether the correct legal process was followed and challenged the legal status of Ngoqo’s affidavit.
The municipality maintains its conclusion is based on its UIFWE register and supporting schedules, not simply age.
“The municipality’s conclusion is not based on an abstract or unexplained assertion of prescription,” Ngoqo said.
“It is based on the UIFWE register, the period during which the relevant expenditure was detected and recorded, the absence of timeous recovery proceedings, and the fact that the municipality ought, by exercising reasonable care, to have identified the relevant officials, political office-bearers, service providers, causes of action and supporting records.”
This meant, he said, Mpac and council did not need to reconstruct every historic transaction before deciding whether recovery was legally possible.
“The affidavit and supporting schedules should therefore be understood as placing before Mpac and council the evidential basis for the conclusion that the relevant Section 32 claims are no longer legally recoverable,” he said.
“Further reconstruction of each historic transaction may assist in explaining how a particular item arose, but it cannot revive a claim that has already prescribed.”
He rejected the Treasury’s contention that the municipality should conduct an item-by-item reconstruction of every invoice, purchase order or payment, before certifying expenditure as irrecoverable.
“Section 32 requires investigation by a council committee and a council certification of irrecoverability.
“It does not prescribe a single evidentiary method, nor does it require the impossible reconstruction of historic transactions where the municipality’s own failure to act timeously has, itself, rendered recovery legally impossible,” he said.
Ngoqo said the municipality’s reliance on the Treasury’s Circular 68, which sets out steps once UIFWE is suspected or recorded, was that its five-day and 10-day periods were not rules that automatically triggered prescription, but benchmarks for reasonable conduct.
“The circular describes the steps a municipality should take once UIFWE is suspected or recorded, including recording the item, preparing an incident report, identifying persons who may be liable, preserving evidence and placing the matter before the appropriate structures,” he said.
“Those steps are directly relevant to the Section 12[3] inquiry because they indicate what the municipality could and should have known had reasonable care been exercised.”
The municipality has drawn a distinction between UIFWE recorded before and after June 30 2021.
Ngoqo said this did not amount to applying different legal tests, but reflected different evidential positions.
“For the older UIFWE, the municipality’s prolonged failure to identify and pursue recovery rights is itself central to the finding that the claims are now irrecoverable,” he said.
“For later UIFWE, the records are more recent and the municipality is better placed to undertake a more granular assessment.”
He acknowledged some date references or arithmetic examples in his affidavit could be corrected, but said this would not change the substantive position.
Ngoqo rejected the suggestion that a write-off would end accountability.
“Any certification and write-off will not be treated as an avoidance of accountability,” he said.
“Section 32[5] expressly preserves criminal and disciplinary consequences, and the municipality will continue to consider referrals to the SAPS, disciplinary proceedings and, where justified, possible claims under Section 176[2] of the MFMA.”
He said those claims could themselves be affected by prescription.
“It must also be recognised that Section 176 claims are themselves subject to prescription.
“A failure to act timeously in relation to UIFWE does not only affect the municipality’s ability to recover the original Section 32 debt; it may also compromise, and ultimately extinguish, any separate claim against officials or political office-bearers whose conduct caused loss.”
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